MCement posted 1HFY23 core PATAMI of RM16.2m, falling below our and consensus expectations. The miss was due to higher than expected net finance costs. MCement expects gradual uptick in performance moving forward. This will be driven by better volumes and a less strenuous input costs environment. Cut FY23/24/25 earnings forecasts by -32.6%/-26.4%/-30.2%. Maintain BUY with unchanged TP of RM2.78. Our TP is derived based on fully diluted target P/B multiple of 0.87x based on c.50% discount to 10 year P/B average (implies - 1.5SD to 10 year mean). MCement trades at a depressed P/B of 0.54x (more than -2SD below 10 year mean), implying most negatives are priced in.

Below expectations. MCement reported 2QFY23 results with revenue of RM897.0m (4.4% QoQ, 9.2% YoY) and core PATAMI of RM15.3m (+15x QoQ, -72.2% YoY). This brings 1HFY23 core PATAMI to RM16.2m, decreasing by -48.0%. Results came in below both our and consensus expectations at 18.2%/25.8% of full year forecasts. Deviation to our forecasts is mainly due to higher than expected net finance costs. At the EBITDA level, 1HFY23 performance was 45% of our full year forecasts.

QoQ. Core PATAMI surged by 15x to RM15.3m in 2QFY23 alongside improvements in revenue (+4.4%). 2QFY23 saw higher cement ASPs (+8%) as higher input costs were passed through. This translated to an increase in EBITDA margins by +1.6 ppts. There was also stronger contribution from its JV in SG, increasing by 35.4% to RM12.0m.

YoY. Core PATAMI fell by -72.2% even as revenue grew by 9.2%. The deterioration in performance was mainly due to significant increase in energy costs with coal and electricity forming the bulk of it. The start of the Russia-Ukraine war essentially jump started an inflationary coal price environment which culminated in a decline in EBITDA margins YoY by -9.3 ppts.

YTD. Core PATAMI fell by -48.0% due to costs reasons as highlighted above.

Outlook. For 2QFY23, MCement’s volumes fell by -3% QoQ, partly due to GE15 according to management. Nevertheless, MCement expects gradual uptick in performance moving forward. With streamlining of various processes there are signs of dissipating labour shortage in the construction sector which could lead to gradually better volumes sequentially. The possible implementation of MRT3 in the upcoming budget could give a much needed boost to demand. On the costs side, with falling coal prices we think MCement’s profitability margins could slowly improve.

Forecast. Cut FY23/24/25 earnings forecasts by -32.6%/-26.4%/-30.2% post recalibrating for net finance costs.

Maintain BUY, TP: RM2.78. Maintain BUY with unchanged TP of RM2.78. Our TP is derived based on fully diluted target P/B multiple of 0.87x based on c.50% discount to 10 year P/B average (implies -1.5SD to 10 year mean). MCement trades at a depressed P/B multiple of 0.54x (more than -2SD below 10 year mean) implying most negatives are priced in. Downside risks: higher interest rates, mega project cancellations, prolonged high coal/electricity costs.

Source: Hong Leong Investment Bank Research - 24 Feb 2023